First word started percolating around the industry that there had been many pink slips handed out to employees working in Corporate Produce at Supervalu. It seemed to be almost everyone from Scott Morris, Corporate VP–Produce/Floral at SuperValu on down.

As “America’s Neighborhood Grocer,” SUPERVALU is always looking for ways to improve the local shopping experience, so consumers choose our owned, licensed, franchised and affiliated stores before others in the marketplace. To accomplish this important goal, we are continually learning about our customer and what she wants in her shopping experience.

Consumers are seeking greater value and more variety of local produce from their neighborhood grocers. Produce and floral present a unique opportunity to be “hyper-local,” which means we can offer what consumers want and value with that special local touch. At the same time, we have the ability to take advantage of national sourcing and procurement competencies that already exist in our company. With this in mind, today we’re announcing an important initiative that will allow us to better capitalize on this opportunity. We will strengthen our banners’ ability to serve local neighborhoods by giving them the oversight for produce and floral merchandising functions while unifying our produce and floral sourcing and procurement at our internal produce organization, W. Newell. The transition will begin immediately and should be complete by the end of March 2010.

Moving forward, produce and floral sourcing and procurement for the company will be managed by W. Newell, our internal produce organization, which is located in Champaign, Illinois. W. Newell currently manages these functions for our Midwest/Southeast and Eastern Supply Chain Services regions. Retail merchandising responsibilities for pricing, promotion and placement will be the responsibility of the banners. These teams will maintain a strong connection to Enterprise Marketing to meet the needs of consumers.

This transition will further enable our entire network of more than 4,300 owned, affiliated, licensed and franchised stores to derive the benefits that we gain by working as one company with one common objective: satisfying consumers with the products they need, the service and variety they expect, and the prices they want.

It’s important to remember that this decision has been driven by consumer feedback and the unique preferences and demands tied to produce and floral. We view this as an evolution in our ongoing SUPERfusion strategy. We have no plans to take this same approach with our other Enterprise Merchandising departments or Enterprise Marketing functions. With the exception of produce and floral merchandising, all other SUPERfusion activities — such as the ongoing integration of Shoppers and Shaw’s — will continue as planned.

I want to thank you in advance for your support and interest as we move forward. If I can answer any questions for you, please let me know.

Thank you,

— Ed Hanson

It was not really a shock. There had been talk for some time that Supervalu, looking to reduce costs, would choose to rationalize its produce operation, although many were betting it would be W. Newell that was going to get the ax, especially since Gary Gionnette and John Aune, both founding executives with W. Newell, left the company as part of a restructuring in 2009 when W. Newell was realigned with Supervalu’s Midwest-Southeast region.

W. Newell was founded for a very different Supervalu. Supervalu was overwhelmingly a wholesale distributor of groceries, with a small retail operation. The wholesale operation found that in market after market, it was losing out to produce-specific distributors, people like Crosset Company and Caito Foods Service.

Many independent retailers complained that though Supervalu’s grocery distribution was top notch, the company had problems carrying the range of items and selection of brands and difficulty providing the high level of service that made for an excellent produce distributor. So the independents bought groceries from Supervalu and produce from a produce specialist.

In an attempt to hold onto this business, Supervalu set up W. Newell as an independent organization.

With the acquisition of many of the old Albertsons divisions and banners, Supervalu became more of a retailer and so it had captive stores and didn’t have to worry about them defecting. So the issues became different: How to buy most efficiently and merchandise most effectively.

Despite all the talk in the announcement about business reasons for doing this — focusing on local, etc. — it almost certainly is primarily driven by a need to cut costs and we would guess management went with W. Newell and canned Supervalu corporate produce because they saved more money and reduced more staff by doing so.

In the end we doubt it makes much difference. Organizations respond to incentives and W. Newell was more flexible and innovative. This is because it had customers that could walk away. The danger in having W. Newell supply all the corporate stores is really that the evolution of the business to serve mostly captive clients will change the culture of W. Newell, and any good things that Supervalu identified in the operation will be lost as it transforms to serve captive customers.

The plan as articulated, which gives back to the divisions merchandising oversight but maintains centralized procurement, poses a grave risk in produce where, typically, merchandising and procurement need to work hand in hand. In so doing, demand for various items is manipulated to make sure the merchandisers are not trumpeting product that has to be brought in at a premium because, say, contracted volumes are exhausted, etc.

Another problem down the road is that Supervalu is dealing with the recession by focusing on its deep discount Save-A-Lot Division and has announced plans to double the division’s size and to open stores in areas where it already has conventional supermarkets. Save-a-lots, though, are mostly franchises and these independently owned stores cannot, legally, be compelled to purchase produce from Supervalu.

It is a very real problem because Supervalu develops standards for food safety, traceability, sustainability, etc., and the cost of these supply chain responsibilities are buried in the cost of the produce. In the meantime, a “man with a van” shows up at a Save-a-lot bearing produce of unknown origin and an appealing price. Many an owner of a Save-a-lot will be very tempted to buy the cheaper produce.

Perhaps Supervalu went with W. Newell in the hope that its heritage of selling retailers who didn’t have to buy from Supervalu might prove mighty handy in dealing with independent Save-a-lot owners.

One hates to see a lot of good people lose their positions but, of course, Supervalu has a lot of debt and needed to make changes. We wish all our friends who have been let go from Supervalu Corporate good fortune in speedily finding new and rewarding positions.

Our focus in the piece was on retailer’s collection and use of data to sell more. The article, though, also dealt with various consumer tools that seem applicable to the food business, including produce and other perishables:

Last year, Wet Seal introduced a Web feature called Outfitter, which allows users to put together their own outfits online.

The virtual outfits are posted, and users can browse through them, comment and exchange recommendations. So far, more than 300,000 user-generated outfits have been designed, generating millions of page views.

“We can get a read on where our customer is headed faster than ever before,” Mr. Thomas said. The user designs, he said, helped the company see early signs of a recent trend toward more informal outfits — dressy tops, but casual bottoms, usually jeans.

A food retailer or producer could offer a similar feature letting consumers put together their own recipes and even complete meals, say a Thanksgiving dinner or a bar-b-que for twenty people. The same sneak preview of trends — use of vegetarian entrees or specialty cheese, the rise of an ethic cuisine or an increase in the use of small plate or tapas type menus, for example, could easily be deduced from such a social media tool just as Wet Seal looks for style trends.

It certainly seems logical that technology will change the way people shop. Wet Seal has a nifty iPhone app:

In October, Wet Seal created its own iPhone application, called iRunway. With it, a customer in a store can tap in an item’s ticket number — bar code recognition comes later this year — and see how it has been used in outfits that other customers have created online.

The user-generated product selections and recommendations, combined with mobile phone access, build a community of customers that should increase sales, Mr. Thomas predicts. “We’re at the very initial stages, but that will be the wave of the future in fashion retailing,” he said.

This won’t be limited to fashion retailing. Already some of the traceability systems include bar codes or numbers that consumers can enter or scan to get traceability information. We suspect many more consumers are interested in nutritional information, recipes, care-and-handling information, companion items, etc., than care about the row number the product was grown in.

We are not sure if consumers will point to the item or to a retail price sign. But it strikes us as inevitable that consumers will point their PDAs at something — or type in a number — and have all the information in the world about that item at their finger tips. In fact this seems a likely place for a promotion as well. If a consumer starts to show a little interest in a product, won’t a coupon or other promotion be likely as a tool to push that prospect into trying the item?

The prospect of consumers using technology to get information on things they are interested in is intriguing and likely to make consumers less loyal to brands, commodities or varieties. When information is hard to get, consumers are likely to stick to their habits but if they can instantly learn, at the point of display, how to use a new item, what other consumers are saying about the item, what experts say about the item, etc. — the risk of trying something new goes down substantially.

This will help marketers of specialty items and ease the introduction of new items and varieties of exciting items. It also will encourage branding, both local and global, as consumer reputation will be easier to establish. Think of the “branding” on E-bay where vendors fight to get positive references. It is a kind of bottom-up approach to branding as opposed to the top-down approach of using broadcast advertising to build a brand.

Brand-building is an important issue, and Pundit sister publication, PRODUCE BUSINESS, covers the topic on its cover this month and will continue to dive deeper into other aspects of branding in future issues. In addition the Research Perspectives/Comments & Analysis feature in the same issue focuses on branding as it starts a new iteration in which the Research Perspective segment will be provided by a variety of organizations.

This month, Steve Lutz, Executive Vice President of The Perishables Group, presents his argument in a piece titled, “Brand Performance And Produce,” and the Pundit provides a response in a piece titled, “Branding Incorporates Many Traits.” You can read the whole exchange here.

It is a terrific group. Besides operating a high volume independent, Dean also serves as President at the Eastern Produce Council, which, along with PRODUCE BUSINESS, is presenting a new industry event, The New York Produce Show and Conference, which we discussed here.

Jeff just recently transferred to headquarters from King Soopers in Denver, Colorado, where he was Director of Produce and Floral. Jeff was also the recent recipient of the Apple Merchandiser of the Year, presented by National Apple Month and PRODUCE BUSINESS. They don’t call it the Leadership Symposium for nothing and clearly Jeff is pegged for a big future.

Susan is from the “work hard, play hard” school of life and she is both liked and respected by producers for her serious but friendly attitude toward procuring for one of the trade’s leaders in food service.

Robert is an industry veteran with more than 30 years experience under his belt, both in retail and in foodservice. He has been with Sysco since 1993 and has risen the corporate ladder from Produce Category Manager to Regional Operations Manager onto his current position of Director of Strategic Purchasing.

All five of this year’s award recipients are primed both to benefit from the program and, by contributing their diverse experiences, contribute to the program.

The program starts on January 13-16, 2010, so it is coming up quickly. There are a few slots still left. If you can move fast, seize one of the slots available by registering here.

One of the frustrations we have with the legislative process is the lack of transparency. Few laws are so urgent that they must be passed before anyone has had the time to read them. Just as a matter of process, we would support a law prohibiting a congressional vote on any legislation that has not been posted on the internet, with its final language, for at least ten business days. Exceptions could be made in the event of war or similar situations.

For example, people are still combing through the health care legislation to figure out what is in there. For example, did you know that both the House and Senate bills contain almost identical proposals to regulate restaurants?

…it turns out that both bills also extend the nanny state into restaurants and supermarket-deli operations.

The relevant section is titled “Nutrition Labeling of Standard Menu Items at Chain Restaurants,” and the gist is that restaurants and retailers that serve prepared foods will have to display on the menu a “nutrient content disclosure statement,” which will list the calories of each item and a “succinct statement concerning suggested daily caloric intake” designed “to enable the public to understand, in the context of a total daily diet, the significance of the caloric information that is provided on the menu.” The information must also be available in writing and there must be signage advising that it is available.

Restaurants’ daily specials are exempted, but drive-through windows are not. Nor are vending-machine operators. The regulation applies to any outlet with at least twenty stores — including not just centrally owned and operated companies, but also franchises.

…hardly anyone important in the food business is opposing the regulation. Similar legislation, known as the LEAN Act, was endorsed by a who’s who of the restaurant industry, including the National Restaurant Association (NRA). Partly this is because most big fast-food chains publish this info anyway, partly because the industry wants to preempt state and local standards with a federal one and, partly because the NRA is desperately trying to avoid having restaurants blamed for national obesity issues.

The specific problem is that there is not the slightest scintilla of evidence that making such information available changes behavior. California has health warnings so ubiquitous that everyone seems to ignore them. The government mandated that private companies make substantial expenditures to make sure that fresh foods have country-of-origin labeling on them. This was done at the behest of U.S. producers who thought such labeling would swing business to them. Yet there is no evidence that consumers have changed purchasing habits.

Because the cost of executing this new nutritional-labeling requirement is paid by the private sector, it doesn’t show up when the Congressional Budget Office scores the cost of the bill — but a cost it is. Since we have no reason to think there is any effect to this new labeling requirement, we can presume that lots of money will wind up being spent with little or no effect.

The substance of this requirement disturbs us because we don’t like to do things because they make us feel good. We think expecting evidence of efficacy in public policy discussions is reasonable.

But what really disturbs us is that there has been no public policy discussion. The item gets sunk in an enormous bill in the dark of night without discussion or debate. We happened to catch this item — what else is in there that nobody ever heard of?

We recently received this letter from an astute observer of the industry:

We read your report on Fresh & Easy’s results for the first half of their 09/10 FY. Since you are the foremost leading authority on Tesco in the US, we were hoping you might have sales numbers for the first 5 months they were operating, Nov ‘07-Mar ’08.

I see that J.P. Morgan didn’t have an estimate for that period and all the reports we have on file also say that the first time they reported sales was at the end of the 1st half of their FY for 08/09, after they had been operating for 10 months.

We feel there has to be some actual 07/08 numbers floating around somewhere though!

Any information you have would be much appreciated!

Thanks.

— Lisa ReederInnovation Research AnalystH-E-B/Central MarketAustin TX

Well, flattery gets one everywhere, so we will do our best to answer Lisa’s question. Yes, in fact, despite promises to The City in London, the UK’s version of Wall Street, Tesco hid the early results from Fresh & Easy by rolling them into the British numbers. We poked a little fun at this decision in a piece we titled Memo To Sir Terry Leahy: King George II Lost The War; America Is Independent Now, in which we quoted a report authored by James Anstead, then heading up the Citi European Food Retail Team and now doing a bang-up job at Barclays Capital. Here is the heart of the piece:

As if our substantial reporting on Tesco’s launch of its Fresh & Easy concept was not sufficient evidence that things were not all coming up roses, prior to Tesco’s announcement of a “pause” we received word from London that Tesco is likely to attempt to hide the results of its new US venture within the results of its massive UK retail operation. In fact, Tesco has already done so surreptitiously in previous reports.

James receives the credit for catching this subterfuge, which shows he is both smart and minding his knitting.

He is also rather brave.

We learned this when he arranged for the Pundit to present a conference call about Fresh & Easy to investors looking to the Citi team to inform their investment decisions.

Many analysts tremor at letting a negative word pass their lips — because they fear losing access to important companies. Although he acted as Tesco’s advocate in our conference call — and a fierce and effective one at that — James still felt it important to allow Citi’s investors to hear other perspectives.

Now James Anstead has authored a report that made several salient observations:

1. The expectation has been that Tesco would report separate numbers for its USA business:

Until recently, we were under the impression that Tesco would create a fourth ‘reporting segment’ (in addition to UK, Europe and Asia) as soon as the first Fresh & Easy store opened. There were two reasons for us holding this belief:

• We remember Tesco telling us this — and the fact that other parties also remember being told this suggests that our memories are not faulty.

• The consensus sheet that Tesco regularly circulates presents the US as a fourth segment.

2. But now Tesco is hemming and hawing on this point:

It was therefore something of a surprise when, in our conversations with the company, Tesco would not confirm that it would separately report the US business as of 2H07/08. The company was non-committal about how it will report the results of the US business on 15 April, when it is due to release its FY07/08 results. However, we took the fact that Tesco would not confirm its intentions — in an area we had understood to be very clear — as a sign that the results of the US business will not be separately identifiable on 15 April.

3. In fact, Tesco has — without bringing this to anyone’s attention — been hiding Fresh & Easy results in its massive United Kingdom business:

If the US is not reported separately, then the obvious place would be within the UK. (Incidentally this is not unprecedented — Tesco’s one French store is disclosed within the UK, but that is one store in Calais catering to ‘boozecruisers’, not a potentially large part of the group!) We decided to double-check where the US was reported over Christmas and were surprised to hear that F&E’s sales were effectively disclosed within the UK over the six weeks of Christmas trading, within the contribution from net new stores. (It was also disclosed this way in 3Q apparently, although there were hardly any F&E stores open in that period.)

4. Size of business would not justify this plan:

The fact that F&E was disclosed within the UK over the Christmas period strongly suggests that this will be the case for the FY results also. Normally Tesco provides sales details for every country at the 1H and FY stage in its ‘broker pack’. Not only would we expect the US business to remain within the UK on the face of the P&L on 15 April, but we would not be surprised to see it absent from the ‘broker pack’ analysis. This cannot be justified on grounds of size, considering even small countries in the past have at least had their sales featured in the broker pack — eg £4m of sales in Malaysia in 1H02/03.

5. Neither would commercial confidentiality:

Given that this is a 180-degree turn from what Tesco had previously suggested, it would not be surprising for the cynics to use this as evidence that management is disappointed by the early results. Commercial confidentiality does not work as a justification because this consideration would have been obvious to management when they gave the original guidance.

6. Conveniently, including Fresh & Easy numbers, even though small, in the UK numbers would have provided Tesco’s numbers a boost:

The inclusion of F&E within the UK figures must have — very slightly — inflated the contribution from net new space; we tentatively estimate by 5-10bps. Although this is clearly not a huge number by any means, it would have boosted a line that had been showing slight signs of weakness earlier in the financial year.

7. The market may react to a lack of candor on Tesco’s part:

We would argue that the decision to account for the US within the UK over the Christmas period was somewhat disingenuous. We would have expected the company to be quite candid on this topic given its treatment was not what most people would have expected. Indeed, looking back at the trading statement, the company’s comments about the US were made within the international section, not the UK.

And the money quote:

…if Tesco does indeed delay breaking out the US business, it will intensify the perception that F&E has not had an especially auspicious beginning. It will also do nothing for Tesco’s reputation for openness, which is unfortunate. No doubt Tesco will be able to point to other companies that have ‘hidden’ start-up businesses for some time, but the point is that their position seems to have changed since this time last year and the only explanation in our minds is that Tesco is disappointed with the sales figures achieved so far.

Now Tesco’s most recent report emphasizes that where things are reported has no effect on the actual performance of the business and that, long term, if the business is a success, nobody will remember this issue in five years’ time.

The report also emphasizes that Tesco is not attempting to speculate on the actual operating performance of Fresh & Easy but only on how such performance as might occur will be reported.

So, the answer to Lisa’s question is no, there are no official numbers because Tesco tried to bury them in its UK division.

One thing that did come out from the report is that Tesco owes a lot of people, including the Pundit, an apology. Here is the graph Tesco distributed to show how Fresh & Easy is improving on its sales numbers:

The chart doesn’t reveal much, but since Tesco tells us elsewhere that the stores are averaging $11 per square foot, per week, and the chart shows that average sales per store have more than doubled back from their low point when we were doing our estimates — as were others such as Willard Bishop — then Willard Bishop, ourselves and others who were estimating about $5 per square foot, per store, per week were exactly correct and Tesco’s dismissive attitude was just a smokescreen.

So, though the exact figures aren’t public, from this graph we can deduce sales per store at each point in time and by multiplying the sales per store by the number of stores open at that time — 74 stores open as of August 23, 2008 for example — we can estimate fairly accurate numbers even for these early, undisclosed periods.

In any case, the Financial Times is running a piece, Tesco to Grapple with plans to Expand, that quotes Michael Dennis, an analyst with MF Global, saying that Tesco has so far invested $1.4 billion in the US operation and has had operating losses in the $650 million range:

In November 2007, the group invaded the US grocery market — a venture on which Sir Terry Leahy, chief executive, has staked his reputation. But the Tesco juggernaut has been met with the full force of the global economic downturn, which has hit California, Tesco’s launch market, particularly hard.

Tesco has 125 Fresh & Easy stores in southern California, far short of the 500 it had hoped for by February 2010.

Laurie McIlwee, finance director, said recently that there were signs of improvement at Fresh & Easy after the business was relaunched, with sales rising 37.4 per cent in the third quarter, and also stronger like-for-like sales.

Consequently, Tesco expects the business to make a loss over the full year close to its $259m (£160m) deficit of last year.

According to Michael Dennis, analyst at MF Global, Tesco has invested about $1.4bn in Fresh & Easy. He forecasts that it will have lost about $650m between its launch and February 2010.

Tesco has also put an expansion into northern California on hold but has continued to acquire sites in central to northern California. It is opening four stores in the Fresno area, its most northerly location to date.

Lucy Neville-Rolfe, corporate and legal affairs director at Tesco, says the retailer will move further north when it makes sense to do so.

“We did not expect to have the greatest recession since the 1930s. What we have got to do is do the right thing,” she says.

As we pointed out here, this claim that Tesco’s problem in the US has something to do with the recession is a lot of hooey. The recession actually gives a well capitalized company such as Tesco an opportunity to shine. If the company had a concept that made money, it would be utilizing this moment when real estate and labor are available to expand across the country. In fact, if all these stores were providing superlative returns on capital, Tesco would be looking to open them, well, in Texas, which is why sharp analysts like Lisa Reeder at forward-thinking companies such as HEB are smart to keep their eyes on Tesco.

Since we have written so much on Tesco’s Fresh & Easy, we sometimes have gotten questions about why it was important. Lisa’s letter is evidence for the basic proposition of the Pundit… to look for things that may be important in the future even if they seem insignificant now.

We thank Lisa for raising a question that points out that the sharpest companies don’t wait until a threat is in their neighborhood to understand it. In making that point publicly, Lisa and HEB provide a real service to the industry. Many thanks.